Geopolitics continues to shape sentiment across all markets. A somewhat encouraging development in the Israel–Hamas conflict emerged yesterday: the Palestinian terrorist organisation reportedly agreed to a 60-day ceasefire proposal and to release half of the Israeli hostages in exchange for Israel freeing some Palestinian prisoners, according to Egyptian mediators. Israel’s response has not yet been forthcoming, and Hamas has rejected the Israeli demand to disarm. Nonetheless, this represents a small step toward a more peaceful region—one that, if implemented, could reduce some of the geopolitical risk premium and potentially normalise shipping through the Red Sea and the Suez Canal.

While lasting peace remains anything but guaranteed in this historically volatile region, it appears even more evasive in Ukraine. Although Ukraine, Russia, and the US continue to call for an end to the fighting on a rhetorical level, oil prices received a timely boost from reciprocal attacks on energy infrastructure. Deliveries of Russian crude oil to Hungary and Slovakia were halted after Ukraine reportedly damaged a transformer station on the Friendship pipeline. Not to be outdone, Russia struck oil facilities in Ukraine operated by the Azerbaijani company SOCAR. Further upside nudge came from former US trade adviser Peter Navarro, who argued in an opinion piece in the Financial Times that India must halt its purchases of Russian oil, as they effectively help fund Russia’s war effort.

Following last week’s US–Russia summit, President Trump welcomed the Ukrainian leader and EU officials to the White House to discuss potential steps toward de-escalation. Compared with the Oval Office berating in February, the meeting could be characterised as civilised. The idea of a US security guarantee akin to NATO’s Article 5 was discussed, contingent on peace being reached between Ukraine and Russia. Ukraine even floated the idea of a $90 billion sweetener in the form of US weapons purchases. Investors’ mood has brightened, and oil prices are reversing yesterday’s gains.

Of course, a long-lasting and stable peace requires face-to-face talks between Volodymyr Zelensky and Vladimir Putin. The latter has refused such meetings in the past, a clear sign that Russia’s ultimate aim, eliminating the so-called “root causes” of the conflict, remains unmoved. There is no reason to believe that will change in the future. Those sceptical of an amicable resolution will likely be proven correct. The war will, in all likelihood, drag on, despite, as discussed below, further economic pressure would plausibly force Russia to rethink its strategy.

Are Tighter Sanctions on Russia Feasible?

Time will tell whether the weekend’s summit between the US and Russia was a historic win or a historic sin. In the immediate aftermath of the talks between Donald Trump and Vladimir Putin, it was the latter who popped the cork. His stance towards Ukraine hardened, and he did not make a single concession in return for peace or a ceasefire. It seems the US President, keen to avoid confrontation, effectively gave him carte blanche to continue Russian aggression against Ukraine. In fact, he went as far as to warn the Ukrainian leader that it was up to him either to end the war or to continue fighting, although he slightly altered his tone yesterday. This marks yet another shift in his position, and for now, Russia feels emboldened again. No new sanctions are forthcoming against the aggressor, but it is worth reviewing whether the punitive measures already imposed on Russia have been effective.

Looking at macroeconomic developments, the picture is getting progressively worse. The bottom line is that Russia’s economy is driven almost entirely by its war effort; the country grows because of its war economy. Its apparent resilience is misleading and likely conceals an ugly truth. Current growth is primarily the result of massive government defence spending. Sectors unconnected to the military are suffering. Productivity growth is sluggish. Industrial facilities are operating at 83% of capacity, and nearly three-quarters of companies report labour shortages. Low unemployment figures are misleading: there are 1.6 million job vacancies.

Economic growth is slowing sharply. The 2Q 2025 expansion rate was a mere 1.1%, down from 4% during the same period in 2024, largely due to defence spending. The IMF now expects the Russian economy to grow by just 0.9% this year. Inflation remains high: consumer prices rose 0.2% from May to June, pushing the annual inflation rate to 9.4%. Interest rates stand at 18%, and the central bank’s target of reducing inflation to 4% next year seems more like wishful thinking than a realistic expectation.

The dire state of the economy is chiefly the result of financial sanctions. Russia has been cut off from the SWIFT payment system, and hundreds of billions of dollars of its foreign assets have been frozen. Shifting to alternative systems, such as China’s CIPS, alleviates the pain somewhat; however, Western financial sanctions, including bans on access to goods and technologies supporting the military and the wider economy, are causing significant damage.

As one of the world’s largest energy exporters, Russia inevitably faced restrictions on energy sales. Before the invasion, the EU was its biggest buyer of oil and gas due to geographical proximity. After February 2022, the bloc decided to drastically reduce its purchases of Russian natural gas. Russia’s share of EU gas imports (pipeline and LNG) dropped from 45% in 2021 to below 20% last year, with the declared goal of eliminating reliance on Russian gas entirely by the end of 2027.

The G7 countries introduced a $60/bbl price cap on Russian crude oil in an effort to deprive Moscow of vital revenues while maintaining stable global supply. The jury is still out on its effectiveness; however, the cap was recently replaced (without US participation) by a floating limit, set at 15% below the average market price over the previous three months. In January, the US Treasury imposed sanctions on Russian oil companies and their “shadow fleet,” used to bypass Western restrictions. Yet, “friendly countries,” particularly China and India, remain loyal buyers of Russian crude, lured by steep discounts, which help Moscow finance its war. Still, Russia’s energy revenues are falling. According to the Centre for Research on Energy and Clean Air, the country’s fossil fuel revenues, including coal, LNG, pipeline gas, crude oil and refined products, fell from €1.24 billion in March 2022 to €593 million in June 2025, a significant plunge.

It is reasonable to conclude that sanctions are hurting but not crippling the Russian economy. The consensus after the weekend’s summit was that while President Trump is eager to see an immediate deal between the warring parties, Russia is playing the long game. Nevertheless, deteriorating economic conditions suggest that the country’s resilience is not infinite. After all, the laws of economics apply here, too. Declining GDP growth, high inflation and interest rates, and strained government finances are unsustainable. Sooner or later, the basic principles of economics should force Russia to the negotiating table. In this respect, time is not on its side. Alas, politics often overrides economic logic.

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